Financial Crisis May Slow Cellulosic Ethanol Momentum

CHICAGO – It seems ethanol just can't get a break.

Dogged recently by a food-vs.-fuel debate, plus a distribution network still stymied by a lack of pumps at U.S. filling stations, widespread commercialization of second-generation cellulosic ethanol now faces financing difficulties.

With a major credit crisis wreaking havoc on the world's lending institutions, convincing investors to buy into start-up technology firms has become tough sledding.

“It's not an easy process,” says Wes Bolsen, who as chief marketing officer at Coskata Inc., a biology-based renewable-energy company, is tasked with raising money to finance commercialization of its non-foodstock-based cellulosic-ethanol production process. “It's an unbelievably difficult financial market.”

Still, Bolsen says Coskata has been fortunate. Its gasification process for turning almost any carbon-based material into ethanol – such as forestry and agricultural byproducts and industrial and municipal waste – is far enough along that the company's third round of financing should close in the coming weeks.

In fact, Bolsen says the latest financing initiative attracted so much interest, Coskata decided to group investors to meet demand for a stake in the company.

Coskata’s Wes Bolen says finding ethanol investors difficult in current financial market.

“It's a testament to the strength of the Coskata process,” Bolsen tells Ward's on the sidelines of a recent biofuels conference here sponsored by Platt's, an energy-information provider, and General Motors Corp.

Bolsen suspects the third round of financing will represent Coskata's final fundraiser before either going public or a sale of the company to a single owner.

However, neither an initial public offering nor buyout likely will occur before the company builds at least two or three commercial plants capable of producing at least 300 million gallons (1 billion L) of ethanol annually, he says.

Coskata early next year plans to launch a $25 million commercial demonstration plant near Pittsburgh capable of producing 40,000 gallons (151,416 L) of ethanol annually, but the company has set no timetable for a commercial plant.

“The hurdles now are pulling together all the project financing,” Bolsen says. “The $300 million, $400 million, $500 million it takes to build” a commercial plant.

Experts such as David Webster, founder and principal of Ark Resources LLC, a consultant to the biofuels industry, says for any single cellulosic technology to be taken seriously by investors, its producer must have at least three commercial plants.

Outside of pilot plants and demonstration-size facilities, such as Coskata's Pennsylvania operation and a 40-million gallon (151 million L) capacity plant Mascoma Corp. recently announced for Michigan, cellulosic-ethanol production has not reached commercial scale.

Most experts expect the first commercial plants to arrive in the 2010-2011 timeframe.

The renewable fuels standard passed by Congress and President Bush last year calls for 36 billion gallons (136 billion L) of ethanol production by 2022, with cellulosic grades accounting for 16 billion gallons (61 billion L).

Experts think cellulosic ethanol could reduce oil demand by 30.0% to 35.0% by 2030.

This year, U.S. ethanol producers will make 9.2 billion gallons (34.8 billion L) from 168 plants, mostly using first-generation grain-based processes. The nation's largest ethanol plant, a corn-based operation, produces about 120 million gallons (454 million L) annually.

Bolsen says investment from Fortune 500 companies holds the most promise for start-up producers such as Coskata and Mascoma, which have proven their technologies and are on the cusp of widespread commercialization.

GM owns a stake in both companies. But another major and somewhat surprising benefactor to cellulosic ethanol producers has emerged recently – oil giant British Petroleum plc.

Big Oil studiously has downplayed its role in advancing ethanol use, with American Petroleum Industry President and CEO Red Cavaney recently telling Ward's nationwide demand simply does not exist.

He also says independent filling station owners, which comprise 90% of the gasoline distribution network in the U.S., find adding ethanol pumps too costly.

Susan Ellerbusch, vice president-Americas and Asia Biofuels, BP Products North America Inc., admits the commitment among oil companies varies.

“There's a whole continuum of players in the biofuels industry…as a whole, (and) that's also true for oil companies,” she tells Ward’s at the Platt's conference here.

“We are fully engaged, whether it be feedstock development or conversion technologies using today's biofuels feedstocks or the work we are doing for the future through our partnerships. We are highly committed to the industry.”

In August, BP formed a joint venture with Verenium Corp., where the oil company will provide $90 million to the cellulosic-ethanol producer in exchange for rights to current and future technology held within the partnership.

Earlier this year, BP spent $1 billion for a 50% stake in Tropical Bioenergia S.A., a JV between the Brazilian companies Maeda Group and Santelisa Vale. The partners are building an 11 million-gallon (435 million-L) ethanol refinery in Brazil slated to begin production this year. Plans call for a second plant. Both facilities will supply locally and export to the U.S., Europe and Asia, as well.

In February, BP joined with DuPont to develop and commercialize biobutanol, which would increase the biofuels blend in gasoline beyond its present cap of 10.0%. A demonstration plant in Hull, U.K., launches next year. BP also has started the Energy BioSciences Institute at the University of California-Berkeley with a $500 million outlay.

“We are taking the leading investments and making the biggest moves,” Ellerbusch says. “And they are not just bit investments.”

But the biofuels industry must address the issues of feedstock production, she warns. Unlike the Brazilians, who operate massive farms growing perennial energy crops, agriculture in the U.S. focuses on food crops from small, family-owned operations.

“We've got to create a new model for energy crops, which is a lot of work,” Ellerbusch says. The industry also needs to narrow the field of cellulosic- ethanol production technologies, which will bring costs down to a manageable level.

For example, Coskata relies on a 3-step gasification process that produces ethanol for about $1 per gallon, or roughly half the cost of gasoline, while Mascoma employs a single-step method called “consolidated bioprocessing” and costs between $1 and $1.50 per gallon to make.

Verenium targets a similar cost and, as with Coskata and Mascoma, relies on microorganisms to break down biomass and convert it into ethanol. However, it uses a fermentation process, and its business will take feeedstocks from the field to the pump.

By comparison, Coskata and Mascoma are looking to license their technology to other companies that will produce and distribute the ethanol.

Critical to solving those two issues, Ellerbusch says, is continued support from the U.S. government in the form of mandates and incentives, such as the renewable fuels standard.

“When we saw the RFS pass in December, we accelerated our activities by several years,” she says. “With that continued support, I think you'll continue to see money coming into this industry to solve a lot of these issues on feedstocks and conversions. Both are achievable.”